Energy Futures Sink, Recession Fears Loom

Energy prices are starting the week off on a soft note, with 3-4 cent losses for gasoline and 2 cent losses for diesel. Despite the pullback, weekly charts still favor more upside for gasoline prices, while distillates continue to look neutral weak on the charts.

A Bloomberg article over the weekend highlighted how weak diesel demand figures are flashing recession warning signs around the globe. That report highlights several reasons why the slump has been worse on the West Coast. The big question now, after diesel prices fell $2/gallon in Q4 and stagnated in Q1, is whether or not the worst of the demand slump is in the rearview mirror. 

Short covering continues to be a major theme for money managers in NYMEX contracts with WTI and HO both seeing sharp reductions in bets on lower prices last week, increasing the net length held by large speculators.  RBOB didn’t see short covering, but it did see another healthy influx of funds betting on higher gasoline prices, pushing the net length held by money managers to a 6-week high. It’s worth noting that unlike what we saw in NYMEX contracts, managed money positions in ICE Brent and Gasoil contracts saw reductions in net length last week, with an influx of new money betting that European diesel prices will continue to fall, pushing net length in the contract to a 3.5 year low.

Baker Hughes reported more declines in US drilling last week, with the total oil rig count dropping by 2 and natural gas dropping by 1. While the total rig count continues to slide, the off-shore rig count quietly hit a 3 year high last week. While 20-rigs pales in comparison to the 100+ rig counts we saw 20 years ago, it may be an important change in strategy for companies that are more confident in profitable oil prices to justify long-term offshore projects. 

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